Thread: Portugal Insolvent says Citigroup; Ireland Will Default

Tuesday, November 30, 2010 3:33 PM

"Portugal Insolvent" says Citigroup Chief Economist; Why Ireland Will Default

Citigroup's chief economist, just threw fat in the Euro-fire with his statement ‘Insolvent’ Portugal Needs Loans Soon http://noir.bloomberg.com/apps/news?pid ... 6r__CesERo

Portugal is “insolventâ€

Wednesday, December 01, 2010 2:08 AM

Barbershops Open in 2013, Market Screams for Haircuts Today; European Crisis Spreads to Core as Belgian Bond Yields Surge; Another "Stress Test" Scam

Swaps are soaring in Ireland, Portugal, Spain, Greece, and now Belgium. The market has correctly figured out there will be haircuts on senior bank debts. The problem is the ECB wants a free lunch but no haircuts until 2013, hoping of course the need for haircuts goes away in a few years.

Central bankers cannot and will not win this battle of nerves. The market is bigger than the Central bank.

Market Screams For Haircuts Today

In country after country the crisis is spreading because fools at the ECB want to delay haircuts.

Just ask Let's ask Christian Noyer, governor of the Bank of France, or ECB president Jean-Claude Trichet.

Christian Noyer said "As far as I'm concerned, I exclude that there will be haircuts in the future".

Jean-Claude Trichet warned German Chancellor Angela Merkel not to "unsettle bondholders".

No-Scissors Bluff Fails

Unfortunately for the ECB, the market's reaction to the no-scissors bluff of Christian Noyer and Jean-Claude Trichet was to suggest a need for haircuts in Belgium.

As proof that hair grows when and where you don't want it to, please consider European Crisis Spreads to Core as Belgian Bond Yields Surge http://noir.bloomberg.com/apps/news?pid ... yHSRTuHR9Y

Europe’s sovereign crisis is spreading to the heart of the 16-nation bloc as investors question Belgium’s ability to cut the euro region’s third-highest debt load, overshadowing its economic performance.

The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds of similar maturity widened to 139 basis points at 5.10 p.m. yesterday in Brussels, the most since at least 1993. The cost of insuring Belgian government bonds rose to a record for a second day, according to CMA prices of credit-default swaps.

The European Union’s 85 billion-euro ($111 billion) rescue package for Ireland has failed to quell market turmoil as investors shift their focus from peripheral states to countries such as Belgium, whose capital is home to the EU’s political institutions. While the country’s economy has been among the region’s growth drivers this year, inconclusive elections left it without a government, raising concerns on its budget outlook.

“Belgium has moved to the foreground as investors ask themselves ‘who’s next?’ to ask for help,â€

Ireland Debt Crisis Bailout For the Banks, Subjugation of the Irish People

Interest-Rates / Global Debt Crisis Nov 30, 2010 - 09:42 AM

By: Philipp_Bagus

Europe is in turmoil once again. The sovereign-debt crisis threatens to spread from Ireland to Portugal and Spain. It all began with the financial crisis. Before the financial crisis, several governments of the eurozone, most notably those of Portugal, Italy, Ireland, Greece, and Spain (PIIGS), had been able to finance their deficits at artificially low interest rates. Some had accumulated unsustainable levels of public debts.

Such reckless fiscal behavior was only possible because markets assumed that if the national situations got worse, these governments would be bailed out by other countries of the eurozone in order to forestall a breakup of the euro. In other words, the euro came with an implicit bailout guarantee permitting governments to overindulge in debt. The implicit guarantee was and still is grounded in political interests. A failure of the euro would be interpreted as a failure of the idea of European centralization — i.e., of the European Union. This failure is regarded as something politically inconceivable.

Equipped with this implicit guarantee, many governments did not address structural problems such as uncompetitive labor markets or unsustainable welfare systems. They papered over these problems with government deficits. As the financial crisis hit, government deficits increased sharply due to increasing public spending and falling revenues. Deficits soared, not only in the PIIGS countries (the bailout candidates), but also in the countries that were supposed to pay the costs of bailing out the PIIGS governments (most prominently Germany).

It was at this point that market participants wanted to see something more than implicit promises. They started to doubt that Germany and others would be capable of bailing out the PIIGS governments, or willing to do so. Interest rates for bonds of PIIGS governments soared. Finally, in May 2010, eurozone governments had to make the implicit bailout guarantee into an explicit one. They installed a €750 billion rescue fund.
Causes

The rescue fund has a limited term of three years. At the end of October, German chancellor Angela Merkel made it clear that the term would be extended only if there was a reform making private holders of government debt participate in the costs of future sovereign bailouts. In other words, Germany threatened to take away part of the explicit bailout guarantee it gave to private investors in government debts. Investors could suffer losses in bailouts after 2013. As a consequence of this move, investors started selling government bonds of PIIGS countries. Yields increased.

The market's attention focused on Ireland. The Irish government has an estimated deficit of 32.5 percent of GDP for 2010 and its total government debt stands at 80 percent of GDP after repeated spending to prop up its insolvent banking system.

While the deficit is huge, the Irish problems are somewhat different than the fiscal problems of other PIIGS governments. Other PIIGS governments suffer from high and structural public deficits due to unsustainable welfare spending and uncompetitive factor markets. Governments, most prominently the Greek one, used deficit spending to artificially increase the living standards of their populations. Deficits financed the unemployed, public employees, and pensioners; this served to sustain inflexible labor markets.
"The euro came with an implicit bailout guarantee permitting governments to overindulge in debt."

Not so in Ireland. In some sense Ireland was even too competitive. Ireland has the lowest corporate tax rate in the Economic and Monetary Union (at 12.5 percent). The tax rate attracted banks from all over the world to expand their businesses on the island. As a consequence, Ireland's banking sector expanded substantially. During the boom years, banks earned immense profits through their privilege of credit expansion and their implicit government backing. As a result of the credit expansion, an Irish housing bubble developed. And its burst caused substantial losses and even insolvency for Irish banks.

While banking profits during the boom were private, its losses were socialized on September 30, 2008, when the Irish government guaranteed all Irish bank liabilities. As of late 2010, Ireland has injected about €50 billion into its banking system. The Irish problems were created, not by an excessive welfare system, but by the socialization of the losses of a privileged banking system.
The Bailout of the Irish Government

The Irish bailout will cost €85 billion at a subsidized 5.8 percent interest rate. Part of it could be used to set up a fund for the Irish banking system. The bailout will make ordinary taxpayers responsible for loans that serve to cover bank losses, and the Irish population largely opposes it. The Irish understand that the bailout money will mainly serve, not to sustain the living standards of public employees, the unemployed, or pensioners (as in the Greek case), but rather to sustain the living standards of bankers.

Due to the opposition, the Irish government has decided not to have general elections before the budget is passed. The budget includes an increase of the sales tax from 21 percent to 23 percent. Effectively, the Irish population is forced to assume the debts of banks and then pay them back over the years. No democratic vote on the bailout is allowed because the Irish would most certainly vote it down.

Why did the eurozone governments pressure Ireland to ask for the bailout?

First, yields on bonds of PIIGS countries were rising. After the announcement of Merkel's reform plans, market participants started to fear that they would suffer losses from PIIGS bonds. Eurozone governments believed that by bailing out Ireland and showing determination they would take pressure off of Portugal. Portugal — with structural problems similar to those of Greece — is important because Spanish banks have invested important sums in Portugal. If Portugal were to fall, the Spanish banking system would fall along with it. At this point, the rescue fund would be empty and the situation uncontrollable. In order to stop this chain reaction, Ireland was pressured to accept the bailout.

Second, it was important to bail out Irish banks because English, French, and German banks had invested important sums in Ireland. Irish losses could eat up the capital of European banks and bring down the whole European banking system and its government allies.

But how could the Irish government be "convinced" to accept a bailout even though the Irish population was strongly opposed to it? Why would the Irish government ask for a bailout even though it claims to be funded until well into 2011? There were two instruments to pressure the Irish government.

The first is the financing that Irish banks receive from the European Central Bank (ECB). Since the financial crisis, Irish banks have depended on loans from the ECB. Without these loans, the Irish banks would go bankrupt, implying tremendous losses for the Irish government, which guaranteed its banks' loans. Indeed, Jean-Claude Trichet, president of the ECB, mentioned during the days in which the Irish government was still resisting a bailout that the ECB was not willing to extend the emergency loans to Irish banks forever. The second instrument was Germany's threat of withdrawing from its guarantees. Once Germany takes away its guarantees for overindebted governments in the eurozone, these governments are sure to fail due to soaring interest rates. Thus Germany can pressure peripheral countries to make reforms or accept bailouts.
Effects

Can the Irish bailout stop the chain reaction? It does not seem so. Portuguese and Spanish yields continue to climb. If Ireland gets bailed out, someone has to pay for it. Governments of the eurozone will have to pay higher interest rates for their own debts due to the additional burden caused by the loans to Ireland. Since the bailout became imminent, the yields of even German government bonds have increased.

The Irish bailout actually weakens remaining countries. A bailout of Ireland increases Portugal's obligations (and thereby the yield on its debts) and could trigger a Portuguese bailout. A Portuguese bailout in turn would increase the debt burden for Spain and other countries, which eventually might trigger Spain's bailout. And so on until the point where market participants stop believing that the remaining countries can or are willing to shoulder the bailouts.

Another important effect of the bailout is the decline of democracy in Ireland. The Irish government was pressured into the bailout. The population is not allowed to vote on it.

Finally, the bailout leads to a centralization of power in the European Union. European politicians already indirectly determine the Irish budget. For instance, they tell the Irish government to increase taxes, such as the sales tax. They also put tremendous pressure on the Irish government to abandon its policy of a low corporate-tax rate, a policy that many European politicians regard as "fiscal dumping." Here, at last, the Irish government resisted.

In the short run, one may find some positive aspects of the determination of fiscal policies by Brussels or indirectly by Germany. When Germany or Brussels tells Spain, Greece, or Ireland to reduce their deficits, the result for people living in these countries may be a reduced size of the government in the short run. But such centralization of power in the EU will likely prove to be disastrous for liberty in the long run. The European interventionists now claim that because there is one central bank we need one economic policy.

One factor that frequently hampers governments' attempts to increase their power via increases in taxation or regulation is the competition of other governments. If taxes get too high in a country, economic agents will flee to countries with lower tax rates (such as Ireland, with its low corporate tax rate). If economic policy is centralized in the European Union, this limitation on government power is eliminated. European politicians already aim at a harmonization of fiscal policies and talk about benchmarks for tax rates. Once fiscal policies are harmonized, there will be a tendency toward an increase of power in Brussels and then toward an increase of tax rates throughout the eurozone.

The euro might be saved, but at the cost of building a strong, central European state, as national policymaking is transferred to Brussels in exchange for bailouts. The turmoil produced by the euro will then have served as an instrument for the development of a centralized state in Europe.

http://www.marketoracle.co.uk/Article24659.html

many links on this post; go to the link above to view them

IMF and EU Hammer Ireland

Economics / Economic Austerity Nov 30, 2010 - 04:13 AM

By: Mike_Whitney

The terms of the EU/IMF's €85 billion ($113 billion) bailout for Ireland are much worse than analysts had anticipated. Ireland will be required to use its National Pension Reserve Fund (NPRF) to shore up its insolvent banks and to maintain government operations. At the same time, senior debt-holders will not share any of the losses brought on by the banks reckless lending. According to Bloomberg News, "Prime Minister Brian Cowen told reporters there had been no support in talks to ask senior bondholders to lose part of their stake on loans made to Ireland's debt-crippled banks." Thus, 100 percent of the EU/IMF's €85 billion "Financial Rescue Package" will be paid for by Irish taxpayers.

This is a very bad deal. Irish workers have already endured nearly 3 years of depression-type conditions with shrinking wages, soaring unemployment and dwindling home equity. Now Brussels is taking aim at pensioners to save bondholders in Berlin and Paris from any losses on their bad bets. And that's not all. Here's an excerpt from the government's statement:

"The facility will include up to €35 billion to support the banking system; €10 billion for the immediate recapitalisation and the remaining €25 billion will be provided on a contingency basis. Up to €50 billion to cover the financing of the State.....If drawn down in total today, the combined annual average interest rate would be of the order of 5.8% per annum."

This is nothing but extortion. If Ireland wants to put its banks on solid footing, there's a way to do it that doesn't involve years of debt-slavery for its people. The government can underwrite the banks with a €10 billion loan from the Pension Reserve Fund that will guarantee deposits while the banks are nationalized and restructured. It is an excruciating process, but it's been done many times before. Ireland does not have to accept indentured servitude if it chooses not to.

And why would the government even consider paying an interest rate of 5.8% per annum? Interest rates should be the same as they are for the banks; 1 percent. Should a sovereign nation get a worse interest rate than a crooked banker who ripped off millions of investors?

Besides, Ireland is in the drivers seat. It's Ireland that should be making the demands, not the IMF or the EU. After all, the government currently owes the European Central Bank more than €130 billion. If the ECB wants to get its money back, it should be flexible about the conditions. Otherwise, Ireland can simply cut off negotiations and let the ECB hire a collection agency. See what good it does them.

Here's more from the government's statement: "The Programme for Support lays out a detailed timetable for the implementation of the measures contained in the National Recovery Plan....The Programme has two parts – the first part deals with bank restructuring and reorganisation and the second part deals with fiscal policy and structural reform."

(Note--Bank restructuring is a moot point. Ireland can use its own national pension fund to guarantee deposits and underwrite loans.)

"The Programme endorses the structural reforms contained in the Plan which will underpin a return to sustainable economic growth over the coming years....The Programme endorses the Irish Government’s budgetary adjustment Plan of €15 billion over the next four years, and the commitment for a substantial €6 billion frontloading of this plan in 2011....The adjustment will be made up of €10 billion in expenditure savings and €5 billion in taxes...."

In other words, more penance for the victims. More belt-tightening, higher unemployment, more foreclosures, fewer social services, slower growth, and an ever-deepening slump. And for what? To be a member-in-good-standing in Brussel's Banktopia?

German chancellor Angela Merkel had been pressing other EU leaders to create a framework in which senior debt-holders would share losses with taxpayers in the future. On Sunday, Eurogroup Ministers announced the creation of a European Stability Mechanism (ESM) which was designed to address Merkel's concerns. It works like this: If a member state appears to be insolvent, then they must agree to a "restructuring plan" that may involve haircuts for bondholders. So far, so good, only that's not the way the ESM will work. Here's an excerpt from the Statement by the Eurogroup which explains why:

"This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut) in the event that the debtor is unable to pay......We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013." Statement by the Eurogroup, Financial Times)

So, an insolvent country (like Ireland) would need to get "majority" approval before it could declare bankruptcy. How's that going to work if the other countries are only interested in protecting their own bondholders? Surely, they would block the process.

Jean-Claude Juncker, the head of the Eurogroup, more or less admitted that the ESM was a fraud when he said that "private creditors would be forced to take losses only if ministers agreed unanimously that the country had run out of money." (Bloomberg) There's no way that German government officials would allow a country like Ireland to declare bankruptcy if its own banks stood to lose billions of dollars. (which they would)

This should remove any doubt about whose interests are really served by the Eurogroup.

Prime Minsiter Brian Cowen has sold out Ireland bigtime. The so called "rescue package" should have been rejected outright. It merely provides shady bankers with more money for speculation while condemning the rest of the population to years of grinding poverty and high unemployment. It's a "lose-lose" situation. Here's a blurp from a post titled "Ireland is Bankrupt...letter from an Irish citizen" which seems to sum up the mood pretty well:

"It doesn't matter that we struggled for 800 years to achieve independence, that millions died in the process; it doesn't matter that the folk memory of harsher times is still very much alive; none of this mattered to the few generations that have dismantled our country institution by institution and thrown the Irish people to the wolves..... Our political system is in ruins. The people have lost all faith in their elected representatives.

They feel that welfare for the wealthy, bailouts for crooked corporations and rewards instead of punishments for embezzlement and thievery is the rule of the land. ... Our independent republic is less than a century old and already it's in smithereens -- we're in the gutter and being dictated to by the UK, Germany, France and the IMF. Mr. Ajai Chopra is our new vice-chancellor, our new Taoiseach, our new overlord and big boss and we've just been recolonized, first by our own brood of inbred gangsters and now by international bankers....

...But the blame game serves no useful purpose now: we're all ****ed." (Ireland is Bankrupt...a letter from an Irish citizen", angrybearblog.com )

By Mike Whitney

Email: fergiewhitney@msn.com

http://www.marketoracle.co.uk/Article24650.html